Market for ETFs explodes 

By Neil Behrmann

The number of Exchange Traded Fubds has surged to more than 500 funds worth around $500 billion.

In value terms, the funds, increasingly popular among investors around the world, is about 12 times the levels seen only seven years ago.

Studies by industry players State Street Global Advisors and Morgan Stanley, show that investors in North America , Europe and Asia are buying ETFs to invest in country, sector, commodity and currency indices.

Daily ETF trading volumes on global exchanges reached 437 million shares worth US$29 billion in the summer months, compared with US$16 billion in December 2005.

Investors are swiftly coming to grips with ETFs. They are index funds, comprising a basket of shares covering indices such as the Straits Times or Hang Seng, market sectors such as banks, energy, technology, biotechnology, property and bonds. Gold, silver, oil and currency ETFs have also been issued. They are similar to unit trusts, except that - as their name implies - their units are bought and sold on a stock exchange.

In 1993, when the first ETF was introduced, the global market capitalisation was only $812 million, according to Morgan Stanley. Since then, ETF market capitalisation has increased from $40 billion in 1999, rising to $212 billion in 2002 and $315 billion in 2005. By 2007 it is likely to exceed $500 billion.

Growing numbers of ETFs specialising in equities in China , South Korea , India , Hong Kong , Singapore and other Asian and emerging markets have been issued.

Barclays Global Investors is the largest ETF manager, followed by State Street Global Advisors, while Nomura Asset Management is the largest manager of ETFs in Japan .

Investors are shifting towards ETFs because they do not have to pick stocks in countries of whose companies they might have scant knowledge. Asian markets boomed in 2005 and the first quarter of 2006, mainly because emerging market, mutual and hedge funds were big buyers. But ETFs also played a role as investors can purchase, cheaply, a diversified portfolio of stocks in China , Singapore , Hong Kong , South Korea , Taiwan and India on US, European exchanges and Asian stock markets.

According to Morgan Stanley, there were 233 ETFs quoted on US exchanges at end-May with a market capitalisation of $338 billion, followed by Europe, $70 billion; Japan, $36 billion; Canada, $12 billion; Hong Kong, $7.4 billion; Taiwan, $1.5 billion; China, $980 million; and Singapore, $360 million.

They are attracted by low charges. Annual management fee ranges from 0.1 per cent to 0.9 per cent. Since liquidity has improved markedly and costs are low, investors have also been able to cut ETF holdings during market downturns.

An example of a fast growing ETF is StreetTRACKS Gold Shares. It was listed on the New York Stock Exchange about 19 months ago and its daily volume in value terms now matches those of Citigroup, General Electric and Bank of America, according to Dodd Kittersley, an analyst with State Street Global.

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